S-Corp Election

An S-Corp election is a tax classification you choose — it's not a type of business entity. You can take an existing LLC (or form a corporation) and file Form 2553 with the IRS to be taxed as an S-Corporation. The filing deadline is within 75 days of the start of the tax year you want the election to take effect (or within 75 days of forming your entity).

Here's why freelancers care: as a sole proprietor or standard LLC, every dollar of profit is subject to self-employment tax — that's 15.3% for Social Security (12.4%) and Medicare (2.9%) on the first ~$168,600, and 2.9% on everything above that. With an S-Corp election, you pay yourself a "reasonable salary" (which IS subject to payroll taxes) and take the remaining profit as shareholder distributions (which are NOT subject to self-employment/payroll tax). Only federal income tax applies to the distributions.

The trade-off is complexity: S-Corps require you to run payroll for yourself, file a separate corporate tax return (Form 1120-S), and maintain corporate formalities. You'll likely need a payroll service ($30-50/month) and a CPA for the additional return ($500-$1,500/year). The math only works in your favor when your income is high enough that the SE tax savings exceed these additional costs.

For freelancers earning above $60,000-$80,000 in net profit, the S-Corp election is often the single biggest tax optimization available. The self-employment tax savings can range from $5,000 to $20,000+ annually, depending on your income level. But it's not free money — the IRS scrutinizes S-Corp owners who set their salary unreasonably low to dodge payroll taxes. You need to pay yourself a salary that reflects what someone in your role, with your experience, in your market would earn. Get this wrong and you're facing penalties and back taxes.